Flexible spending account- rethinking use it or lose it

Flexible spending accounts aka FSA are underutilized. If I ask, “How would you like to save, say for example, 20% off your healthcare and summer camp bill, you may think differently. Your discount will depend on your tax rate. Let me give you some background before providing an example of how the savings work.

Types of flexible spending accounts

There are 2 types of pre-tax benefit, flexible spending accounts. One for dependent children and the other for healthcare expenses. For tax year 2017 you can elect to allocate a maximum of $2600 for health care. The maximum allocation for dependent care is $5000.

A dependent care flexible spending account can be used to pay for dependent care services, such as day care, preschool, summer camps, and non-employer sponsored before or after school programs. It can also be used for elder daycare – when an elderly or disabled parent is considered a dependent and you are covering more than 50% of their maintenance costs. For many parents like me it’s much easier to get an idea of how much you spend on dependent care.

Healthcare flexible spending accounts expenses include doctor’s visits, prescription medications and eyeglasses. If eligible, see your plan’s rules for a complete description eligible expenses. If you and your spouse each have a health care flexible spending account, you may each contribute up to the annual maximum, however you may not submit the same claims to both accounts, and you may not transfer funds between accounts. Figuring out health care spending is a bit more complex for most people. First, we don’t want to have health care expenses. Who wants to be sick. Second, its the sheer complication of healthcare expenses such as doctors, hospitals and clinics and drugs.

To get some idea, you can either look at past statements from your insurance company, hospital, doctors and pharmacies to get a grasp of that. Many people pay for it on their credit card and don’t think too much about it. However, if you could essentially pay $.80 and get a dollar of care you may look at things differently.

What kind of savings are we talking?

The following examples show results I got when I Googled FSA tax savings calculators. These are meant to illustrate and are incomplete based on your income, marital status, dependents, etc. See your tax advisor for tax advice to hone in on your situation. These examples assume a married couple with two dependent children making $100,000 and using the statutory max FSA amounts. The total saved was $2026.

If you choose to contribute your total anticipated health expenses to an FSA*

Healthcare FSA contribution results

$2600

Without FSA

With FSA

Annual income

$100,000

$100,000

Your break even if you spend at least this much

$1706

FSA contribution

$0

$2600

Your monthly withholding

$217

Taxable income

$100,000

$97,400

The difference in your monthly after-tax

$142

Estimated tax withholding

$25,998

$25,093

Estimated health expenses

$2600

$0

Net pay

$71,413

$72,307

Estimated savings

$894

If you choose to contribute to a dependent care FSA

Dependent care expense projection

$5000

Your annual dependent care FSA contribution

$5000

Potential federal income tax savings

$750

Potential FICA savings

$382.50

Total tax savings

$1132.50

Depending on where you live/work you may also have state tax savings.

Don’t flex spend the savings

Now what should you do with your saved cash? Don’t treat it like found money. You can add it to an emergency fund. You could use it to find an IRA or add to a company 401(k). Discovering which uses best for you may include conferring with a CERTIFIED FINANCIAL PLANNER professional who has taken a fiduciary oath to work in your best interest. One who has also passed an exam on ways tax planning can put more money back in your pocket. Want to learn more? Click here.

* The IRS limits your maximum annual contribution to $2600 in 2017. Be mindful that your employer may also set limits on your maximum annual contribution, as well as which products and services are FSA eligible. Please check with your employer’s benefits representative before making a final decision. The estimated tax savings provided are for illustrative purposes only, and should not be construed as tax advice. Consult a licensed tax professional for appropriate advice given your individual situation. Plan your FSA contribution carefully, since any unused funds will be forfeited following the end of your plan year or any grace period thereafter.

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